The last three or four decades have seen a remarkable evolution in the institutions that comprise the modern monetary system. The financial crisis of 2007-2009 is a wakeup call that we need a similar evolution in the analytical apparatus and theories that we use to understand that system. Produced and sponsored by the Institute for New Economic Thinking, this course is an attempt to begin the process of new economic thinking by reviving and updating some forgotten traditions in monetary thought that have become newly relevant.
Three features of the new system are central.
Most important, the intertwining of previously separate capital markets and money markets has produced a system with new dynamics as well as new vulnerabilities. The financial crisis revealed those vulnerabilities for all to see. The result was two years of desperate innovation by central banking authorities as they tried first this, and then that, in an effort to stem the collapse.
Second, the global character of the crisis has revealed the global character of the system, which is something new in postwar history but not at all new from a longer time perspective. Central bank cooperation was key to stemming the collapse, and the details of that cooperation hint at the outlines of an emerging new international monetary order.
Third, absolutely central to the crisis was the operation of key derivative contracts, most importantly credit default swaps and foreign exchange swaps. Modern money cannot be understood separately from modern finance, nor can modern monetary theory be constructed separately from modern financial theory. That's the reason this course places dealers, in both capital markets and money markets, at the very center of the picture, as profit-seeking suppliers of market liquidity to the new system of market-based credit.

Avaliações

FY

Excellent explanation of the way money moves the world we live in today. Brilliant professor who's passion and depth of understanding adds to the fascination of the world of money & banking.

GG

Oct 13, 2019

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Fantastic content, it explains how banks work behind the scenes and many intricacies of the current financial system. Super suggested even to those who don't have a financial background.

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Banking as Advance Clearing

The next four lectures extend the money view to the larger financial world of capital markets, where the price of risk is determined in dealer markets for swaps of various kinds. The first lecture is a kind of conceptual introduction, while the second translates the standard finance account of forwards and futures into money view terms, as key building block for what comes after.

Ministrado por

Perry G Mehrling

Transcrição

[CROSSTALK] Now, I want you to understand banks as intermediaries,okay. That is a new, I mean, I mentioned it before but I'll mention it again now, that's a new consumption. We've been thinking of banking as an payment system, okay. We've been thinking of banking as a market making system, okay. But, we haven't really been thinking of it as a way of funding anything, okay. Why can banks fund things? Why can the, banks fund things? Why does this work? Here's a bank. Here, it has deposits. Okay. Why can it fund things? It can fund things because people want deposits, not just to make payments. The payments part requires the bank to have liquidity and worry about liquidity, we know that. Okay. But people also want deposits just as an asset to hold. They, they want to hold money as part of their wealth. They want to hold some fraction of their wealth in money. They don't want to spend it. They want to hold it. The house, household as a whole, want to hold a certain amount of their wealth in, in cash. This is their liquidity reserve. Household's liquidity reserve. So, these deposits are a kind of permanent source of funding for the bank. As long as households are willing to hold them. Not only are they permanent funding, they're cheap funding. Because deposits are close ups for cash and cash doesn't pay any interest. So, you don't have to pay much interest on these deposits, okay? Banks compete and now they're paying interest on deposits. They didn't use to in Gurley and Shaw's, in Gurley and Shaw's day. But, even if they pay interest, it's still less interest than they're paying on bonds or something like this. So, this is cheap funding. It's permanent funding, and it's cheap funding. The permanent part is why they can make long term loans. Right? They don't have to worry that all of these deposits are suddenly going to be cashed in, okay. Any individual bank might worry about that, but the banking system as a whole doesn't have to worry about that. That money demand is, there's a certain amount of it, that is permanent. Now, it could fluctuate, you know money demand isn't stable, okay, but it doesn't, it doesn't go to zero. You know, and so, they can depend on this as a permanent source of funding for making long term loans. And, they can just worry that the, the amount of cash they, the amount of deposits demanded of them has some fluctuation to it, and we have to hold some reserves. Okay. In order to absorb those fluctuations, but not the whole thing, you know. We could have 90% here and 10% here or depending on the instability, and, of course, as a banker you, you see all these data. And, so you can just, you can be cautious and you can save 50/50, and then, you see that over time, basically, deposits never fall below 80% of my balance sheet. So, I can have 80% earning loans and I don't have to hold all these, these cash reserves, you know? And, so, I can reduce my reserves by a lot. and expand my balance sheet, and make more loans, okay. This is, this is banking. And it's because people are holding deposits, not to make payments but as a form, as, as a, as a, as a form of a, a permanent, allocation of their wealth to, provide liquidity in case they have to make payments, but most of them won't have to make payments so that's why it's, it's permanent. This idea that deposits are a wonderful, cheap source of permanent funding, okay, everyone is aware of, and so, society, the government wants it. You know, government wants it, everyone wants this source of cheap funding. Right, okay. And so everyone gets some of it, okay. You think about the American banking system, what do we have? We have the Central Bank that, until recently, you know, basically looked like this. It had treasury bills and cash. Okay. This is the government getting cheap funding, permanent funding from this sort of, thing. We had commercial banks. Commercial banks. Commercial banks are making, are making, loans to, businesses, industrial loans. and they're finally seeing them with deposits, okay. So, business gets into the act. Okay. Commercial banks. Business gets them cheap funding. And we have savings and loans. This is the Jimmy Stewart Banks, okay, that are making household mortgages. [SOUND] Okay. They, I'm going to put deposits in quotes here because legally, they were sort of shares of some, of some kind. But, people used them as deposits and thought of them as money substitutes. And, so, they had the same dimension of being cheap, permanent, permanent funding. So, the way what, what we, what we, sort of, organized is a sharing out of the spoils. Okay. Society wants to hold some of its wealth in this short term money form here, here, here, okay. Different bits of society get funding from that. Households, businesses, and government. But, now, finance point comes in. These banks are facing two eggs, right? They're giving government, business, and households what they want, in terms of borrowing, and they're giving businesses, businesses aren't making these deposits, they're giving another bit of society what they want. But, you can't, these have, the risk passes through, the risk passes through, to someone. To who? Right. [NOISE] Look at the Jimmy Stewart bank there, okay. Loans, deposits, oops, who does it pass through to it? It passed through the government, actually. You see that the FDIC is guaranteeing the solvency and the FED is guaranteeing the liquidity. so, there are these guarantees, and that's the taxpayer there that you're talking about, okay. And, because the taxpayer was involved in this, the, there was bank regulation that said, well, you can't make risky loans, and you can't pay interest on deposits and they created various regulations that, that created an arbitrage. To create non-banks that are doing the same thing, okay. And, that's where shadow banking came from. Shadow banking is created by the arbitrage, by the regulatory arbitrage opportunities provided for, by, by this sort of myth, this notion, that we can give, you know, we, we can take them risky assets, and somehow that risk just disappears, if we just have, have deposits on the other end. It doesn't disappear, okay? It becomes a contingent liability of, of the government, here. In Jimmy Stewart banking, these loans are mortgages to households. These deposits are deposits of households. It stays within the community. It stays within the community. And, that's how that movie works, if, if you remember, that, he's pleading, he's pleading, you know, where's your money? Your money's in your houses, you know. And he's right. He's just talking about his balance sheet there. In shadow banking, first thing up there, okay. The lending, okay, turns into these bonds. Capital market securities that are traded, that have a price. This price comes from the price of risk, of all the different kinds of risks that are in those mortgages. What kind of risks are there in a mortgage? Well, there's duration risk, because they're 30 years, okay. There's default risk because the households, it really depends on the income of the households if the households don't have income, they can't pay for their mortgage, And, and so, that's what you're trying to get rid of, with that interest rate swap and that credit default swap. Get rid of the duration risk. Get, get rid of the default risk, so that you have something that is sort of like a treasury bill. It's a sort of synthetic treasury bill and then you fund that in the money market. So, you're not getting rid of any risk, you're just hedging it. You're selling it off separately. Okay, as opposed to down here, where you're kind of pretending it isn't there, okay? It's the government, it's the government here that's taking that risk without ever knowing it, without doing it on purpose. And, so that, of course is, leads to moral hazard for the bankers and so forth, okay. RNBS has all these risky, strip off those risky fund it in the money market. and then there's no FDIC backstop and there's no federal reserve bank backstop. This is the, this is just like the evolution toward mutual funds. Right, except, except here, these are, these are basically money market mutual funds here. Money market mutual funds. just as we saw, pension funds evolve into stock mutual funds, insurance companies into bond mutual funds, banks became, evolved into money market mutual funds. Okay. Which are funding a lot of this. A lot of these money market mutual funds are not even in the United States. You know, they're, because the dollar is the World Reserve currency, and so the people holding deposits in those money market mutual funds might be Sovereign Wealth funds. Okay? Or foreign central banks, or something like that. Not households. It's not staying in the community. This is a global system, a global dollar system funding sub-prime mortgages in Cleveland. This is a big evolution from where it started, okay. And, it has to do, so, so we're, we're talking here about the evolution from indirect finance, Gurley and Shaw 1960. Okay. To direct finance 2012 today where all the risks are counted for, all the risks are priced in markets. And there's complete integration of the money market and the capital market.